El Salvador: Rise of future flows securitisations

Benjamín Valdez Tamayo

Enacted in 2007, the Salvadorian Future Flows Securitisation Act (Ley de Titularizacion de Activos) regulates the issue of bonds through the Salvadorian stock exchange, to be paid by future cash flows generated by a specific asset. Since then, future flows securitisation has become a relevant finance option in El Salvador, for private enterprises and public institutions alike; to this date, more than $100 million in bonds have been issued. Among those entities that have accessed funding through this type of offerings are schools, industrial paper plants, the Salvadorian Department of Transportation, and beach side resorts.

Technically speaking, future flows securitisation is the process by which an independent estate is incorporated with assets capable of generating future cash flow (for example, lease agreements, decreasing credit lines, the right of government institutions to collect taxes) and whose sole purpose is the payment of principal and interests of publicly issued bonds. In other words, a company issues securities through a stock exchange (thus obtaining funds for a specific business project) which will be repaid, with interest, with the cash flow generated by the securitised asset. A company, duly authorised by the Superintendenciadel Sistema Financiero (the Salvadoran equivalent to the Securities and Exchange Commission) is tasked with the administration of the assets and the cash flow necessary for the payment of the bonds.

Future cash flows securitisation works as per the following simple example. The owner of a future cash flow generating asset (in this case, a leased warehouse), receives $100 a month as rent. As business is on the move, the owner wishes to acquire a second warehouse, for the price of $1000. Since the funds are needed today, the owner issues bonds for $1000, payable on a monthly basis ($100 a month) for a 12-month term. The owner is now capable of purchasing the second warehouse, and the bond holders, earning an interest for their troubles, receive payment of $1200 by the end of the year.

While more common financial options (such as bank loans) in El Salvador are easier to acquire and to access by the public, future cash flows securitisation offers a variety of benefits which could interest the more sophisticated borrower. For starters, lower interest rates can be obtained through the stock market. Flexible payments, call options, lien-free transactions, tax exceptions and a high degree of transparency are available through these public offerings. Because of these benefits, future cash flow securitisation has become an everyday instrument for structured debts, and in the coming years, it will continue to acquire relevance.

Benjamín Valdez Tamayo

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